Out of the Crisis with Subscription Models‍

Out of the Crisis with Subscription and As-a-Service Models

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At the time of writing, there have been more than 430,000 confirmed cases of COVID-19 and more than 19,500 deaths from the disease. COVID-19 continues its spread across the globe, increasing its pressure on companies, markets, governments and individuals alike. As more and more countries are going into quarantine and take increasingly serious measures, most companies are feeling the pain. Business as we currently know it, will change after the COVID-19 pandemic. 2020 will be the year that changed the trajectory of ecommerce and teleworking, but 2020 will also be an opportunity for companies to rethink their business models.

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This article provides business leaders involved in the sale of products with an alternative business model for their companies.

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The economic impact of the pandemic cannot be predicted yet. It is likely to see decreases in demand throughout the year, liquidity shortages, supply chain problems, layoffs and even bankruptcies. Acting rapidly is essential, but business leaders should not loose focus on the longer term and vision of their company.

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At some point, the crisis will come to an end and the economy will start growing again. However, companies that were selling products in the past are likely to see their business models change.

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Why and how business models will change:

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After the crisis, clients will have suffered financially and won’t be prone to undergo important capital expenditures. They will prefer to spend a smaller amount of money on a regular basis – let’s say monthly or annual payments – rather than one big expense. This means that clients will favour OPEX offerings rather than CAPEX ones. From an accounting point of view, this is another benefit, as clients will prefer to increase their costs on their profit and loss statement in order to pay less taxes, rather than increasing their assets on the balance sheet.

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After the crisis, some companies will also sit on an important stock of unsold products with demand levels that have not yet returned to normal levels…

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This is where Subscription and As-a-Service Business Models come in!

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Wouldn’t it be an interesting opportunity to offer products as a subscription instead of selling them in the traditional way? The idea is to sell a solution to the client, rather than selling a product.

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In a Subscription business model, companies combine their products and services, resulting in a more complete offer. This innovative concept offers more value to customers and builds customer loyalty, which in turn generates more business opportunities. Companies offer their products as a subscription, bundled with certain services over a certain period of time.

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In order to visualise which Subscription Models already exist and what companies have already implemented them, you’ll find a few examples hereafter. In the lighting sector, the sale of light bulbs and lamps is replaced by the sale of light per square metre (Signify); in aviation, aircraft engines and turbines remain the property of the supplier who keeps track of hours flown (Rolls-Royce); in the photocopying sector, the sale of printers is replaced by a printing as a service model where clients pay a fixed price per copy (Xerox); and in the automotive world, the sale of cars is transformed into the sale of mobility per minute (ShareNow).

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The success of a Subscription Model requires innovative relationships and strategies between producers and customers and often changes in a company's culture and way of operating. Effective Subscription Models can lead to better business performance.

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How does a Subscription Model work?

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Companies remain the owners of the products, relieving customers of any tasks related to product ownership. The company takes care of installation, usage optimisation, maintenance, repair, refilling, transport and disposal at the end of the product's lifecycle. Not having to take care of these tasks any more is a considerable value proposition to the customer, who can therefore concentrate fully on its core business. In a Subscription Model, the company-client relationship becomes closer and more intense as their interests converge; both players want good quality products with a long life span and which are used frequently with a competitive operating cost. Digitalisation plays an important role in this innovative model. Products can be equipped with digital sensors that collect huge amounts of data on product functionality and usage. This data is analysed and used to continuously improve the product offering to better satisfy and even predict customer needs.

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Why should a company opt for a Subscription business model?

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Subscription Models have numerous benefits, such as going from a one-time sale towards new, recurrent and renewable revenue streams. Another argument is that profit margins are a lot higher for the sale of services, compared to the sale of products. Companies offering a Subscription Model also benefit from an improved corporate image, as they have an incentive to produce products that last longer, thus being more environmental friendly. The most important benefit of these business models is that the customer relationship becomes considerably closer, leading to better customer insights, add- and cross-selling.

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P2S Management Consulting has analysed and worked with companies active in different industries and knows the obstacles to overcome in order to successfully implement a Subscription Model for a given company.  

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Feel free visit www.p2s.be or get in touch via andre@p2s.be.